Question 1

Days' sales in inventory of car dealerships are generally lower when compared to grocery stores.

Accepted Answer

Car dealerships typically have higher days' sales in inventory compared to grocery stores because cars are higher-value items that take longer to sell, whereas grocery items are perishable and sell quickly.

Question 2

Another name for return on equity is return on total capitalization.

Accepted Answer

Return on equity is not the same as return on total capitalization. Return on equity measures a company's profitability in relation to the amount of shareholder equity invested, while return on total capitalization measures a company's profitability in relation to its total capitalization (which includes both debt and equity).

Question 3

The statement of cash ﬂows cannot be standardized.

Accepted Answer

The statement of cash flows can be standardized as it follows a specific format and includes specific categories of cash flows such as operating, investing, and financing. This allows for comparison of cash flows between companies and over time. However, there may be some variations in how companies present certain items, such as the classification of certain cash flows.

Question 4

Days' sales in inventory of car dealerships are generally higher when compared to grocery stores.

Accepted Answer

Car dealerships typically have more expensive inventory, so their days' sales in inventory tend to be higher than grocery stores.

Question 5

When comparing the ﬁnancial statements of one ﬁrm with those of another ﬁrm, a problem that may
be encountered is that the two ﬁrms may be seasonal in nature and have different ﬁscal year ends.

Accepted Answer

If the two firms have different fiscal year ends, it may be difficult to compare their financial statements as it could result in different time periods being compared, including different seasonal patterns.

Question 6

If a ﬁrm has only current assets and no ﬁxed assets of any kind, its times interest earned ratio must
exceed its cash coverage ratio.

Accepted Answer

The cash coverage ratio takes into account both current and fixed assets, while the times interest earned ratio only considers earnings before interest and taxes. Therefore, a firm with only current assets may have a lower times interest earned ratio due to the absence of fixed assets, but its cash coverage ratio could still be higher.

Question 7

An increase in long-term debt is source of cash?

Accepted Answer

An increase in long-term debt means that a company has taken on more debt, which results in an increase in cash inflow. This is because long-term debt is often used to finance investments or acquisitions, which can provide additional cash to the company.

Question 8

Days' sales in inventory of grocery stores are generally higher when compared to car dealerships.

Accepted Answer

Grocery stores typically have lower days' sales in inventory compared to car dealerships because groceries are perishable and need to be sold quickly, whereas cars are durable goods that can remain in inventory for longer periods.

Question 9

Common size statements can only be completed on the statement of comprehensive income and
statement of ﬁnancial position.

Accepted Answer

Common size statements can be prepared for any financial statement, including the statement of cash flows, by expressing each line item as a percentage of a base figure.

Question 10

The most effective methods of directly evaluating the ﬁnancial performance of a ﬁrm is to compare the current ﬁnancial ratios to those of the same ﬁrm from prior time periods and compare a ﬁrm's ﬁnancial ratios to those of other ﬁrms in the ﬁrm's peer group who have similar operations.

Accepted Answer

Comparing a firm's current financial ratios to those of prior time periods and to its peers are effective methods for evaluating its financial performance.

Question 11

A poor industry outlook along with low investor opinion of the ﬁrm are most apt to cause a ﬁrm to
have a higher price-earnings ratio?

Accepted Answer

A poor industry outlook and low investor opinion of the firm would typically lead to a lower price-earnings ratio as investors are less willing to pay a premium for the company's earnings.

Question 12

When comparing the ﬁnancial statements of one ﬁrm with those of another ﬁrm, a problem that may
be encountered is that the operations of the two ﬁrms may vary geographically.

Accepted Answer

Yes, the operations of two firms may vary geographically, which can make it difficult to compare their financial statements accurately. Factors such as exchange rates, local market conditions, and differences in accounting standards can further complicate the comparison.

Question 13

Payment of a note payable and repurchase of common stock are uses of cash.

Accepted Answer

Payment of a note payable and repurchase of common stock both require cash outflows, making them uses of cash.

Question 14

If a ﬁrm uses cash to purchase inventory, its quick ratio will increase.

Accepted Answer

The quick ratio only considers a firm's most liquid assets (cash and cash equivalents, marketable securities, and accounts receivable). Purchasing inventory with cash would decrease the amount of cash available to the firm and therefore decrease its quick ratio.

Question 15

If a ﬁrm uses part of the cash it received from payment of an account receivable to buy inventory
and leaves the rest in its bank account, its current ratio will remain unchanged.

Accepted Answer

The current ratio is calculated by dividing current assets by current liabilities. When a firm uses part of the cash it received from payment of an account receivable to buy inventory, its current assets remain unchanged. Therefore, the current ratio will remain unchanged.

Question 16

Due to the diﬃculty of access the true enterprise value, one can use the market cap as a proxy for enterprise value to calculate the EV/EBITDA ratio.

Accepted Answer

This statement is true. When calculating the EV/EBITDA ratio, it is often difficult to access the true enterprise value. Therefore, market capitalization is sometimes used as a proxy for enterprise value.

Question 17

When comparing the ﬁnancial statements of one ﬁrm with those of another ﬁrm, a problem that may
be encountered is that either one, or both, of the ﬁrms may be conglomerates and thus have unrelated lines of business.

Accepted Answer

Conglomerates may have a mixture of different business lines which makes it difficult to compare their financial statements with those of other firms.

Question 18

The equity multiplier, the proﬁt margin and the total asset turnover are the three parts of the Du
Pont identity.

Accepted Answer

The equity multiplier, the profit margin and the total asset turnover are indeed the three parts of the DuPont identity, which is used to analyze a company's return on equity (ROE).

Question 19

When comparing the ﬁnancial statements of one ﬁrm with those of another ﬁrm, a problem that may
be encountered is that the ﬁrms may use differing accounting methods for inventory purposes.

Accepted Answer

Different firms may use different inventory accounting methods such as FIFO (First In, First Out) or LIFO (Last In, First Out), which can lead to differences in the reported values of inventory on their financial statements. This can make it difficult to compare the financial statements of one firm with those of another.

Question 20

Days' sales in inventory of grocery stores are generally lower when compared to car dealerships.

Accepted Answer

Grocery stores have a faster turnover of inventory as they sell perishable goods which have a shorter shelf life whereas car dealerships have a slower turnover of inventory as vehicles are a high-value purchase and people buy them less frequently. Therefore, days' sales in inventory of grocery stores are generally lower than car dealerships.

Quiz 3: Working With Financial Statements

Days' sales in inventory of car dealerships are generally lower when compared to grocery stores.

Another name for return on equity is return on total capitalization.

The statement of cash ﬂows cannot be standardized.

Days' sales in inventory of car dealerships are generally higher when compared to grocery stores.

When comparing the ﬁnancial statements of one ﬁrm with those of another ﬁrm, a problem that may be encountered is that the two ﬁrms may be seasonal in nature and have different ﬁscal year ends.

If a ﬁrm has only current assets and no ﬁxed assets of any kind, its times interest earned ratio must exceed its cash coverage ratio.

An increase in long-term debt is source of cash?

Days' sales in inventory of grocery stores are generally higher when compared to car dealerships.

Common size statements can only be completed on the statement of comprehensive income and statement of ﬁnancial position.

A poor industry outlook along with low investor opinion of the ﬁrm are most apt to cause a ﬁrm to have a higher price-earnings ratio?

When comparing the ﬁnancial statements of one ﬁrm with those of another ﬁrm, a problem that may be encountered is that the operations of the two ﬁrms may vary geographically.

Payment of a note payable and repurchase of common stock are uses of cash.

If a ﬁrm uses cash to purchase inventory, its quick ratio will increase.

If a ﬁrm uses part of the cash it received from payment of an account receivable to buy inventory and leaves the rest in its bank account, its current ratio will remain unchanged.

Due to the diﬃculty of access the true enterprise value, one can use the market cap as a proxy for enterprise value to calculate the EV/EBITDA ratio.

When comparing the ﬁnancial statements of one ﬁrm with those of another ﬁrm, a problem that may be encountered is that either one, or both, of the ﬁrms may be conglomerates and thus have unrelated lines of business.

The equity multiplier, the proﬁt margin and the total asset turnover are the three parts of the Du Pont identity.

When comparing the ﬁnancial statements of one ﬁrm with those of another ﬁrm, a problem that may be encountered is that the ﬁrms may use differing accounting methods for inventory purposes.

Days' sales in inventory of grocery stores are generally lower when compared to car dealerships.